State-owned steel maker Steel Authority of India Ltd (SAIL) may pull out of a proposed joint venture (JV) with Shipping Corp. of India Ltd (SCI) after the shipping ministry set conditions that it says make the JV ?unworkable?. Government representatives on the board of SCI, also state-owned, had asked the company to get the ministry"s approval for the venture, which was meant to provide shipping services to the steel maker. The Union government owns 80.12% of SCI.

The JV company was to start operations with an initial fleet of eight dry-bulk carriers that can transport up to four million tonnes (mt) of cargo. SAIL imports around 12 mt of coking coal a year, mostly from Australia, to fire its steel plants and pays a shipping bill of close to $300 million (around Rs1,400 crore).

The shipping ministry, however, has restricted its clearance for the JV firm to a cargo of 1 mt. This requires just two ships.

Secondly, the ministry has told the JV firm to go for market-determined rates for transporting the cargo as against the cost-plus rates suggested by SAIL and SCI. Cost-plus rates refer to the cost of operating a ship, including interest, insurance, crew wages, fuel and port-calling costs, plus an 8-10% return on investments.

The boards of SCI and SAIL had agreed to the cost-plus model so the venture could earn a reasonable return on investments and distribute dividends.

Thirdly, the ministry wants the JV firm to use only Indian-registered ships, either owned by the venture or by SCI, to transport the cargo. It also said the JV firm should use SCI"s staff and not incur expenses on recruiting staff or hiring premises.

?SAIL now says that it is not interested in the joint venture as the conditions set by the shipping ministry makes it unworkable,? an SCI executive said. The company has told SAIL it would try to get the conditions removed.

A SAIL executive confirmed the development. Both the executives did not want to be identified.

A shipping ministry official said the venture has been given approval subject to the conditions.

The board of SCI is likely to discuss the issue at its next meeting. ?We are hopeful of sorting out the issue,? said U.C. Grover, a director looking after technical and offshore services at SCI.

Interestingly, both SAIL and SCI are so-called navratna firms, a tag that gives full financial autonomy to a public firm for capital expenditure, JVs, modernization and purchase of equipment.

?This case clearly demonstrates that business decisions of navratna companies continue to be dictated by the government,? said an executive with a Mumbai-based shipping consultancy firm. He did not want to be named because he is not authorized to speak to the media.

SAIL currently uses a combination of spot and long-term hiring of ships for one-five years to manage its annual shipping costs.